Calls Puts confusion...

[stargazer]

Hi all

This gets frustrating there must be a laymans explanation to remember what each of the following do. I thought I did and just when I read to educate a bit more i get confused again. Could someone put me right?

Buy Call option.....

Sell Call option Means: receive the premium to sell stock you own ( if Covered call) at a agreed price at or before an expiration date. If don't own then must have it if assigned. You have the obligation

Buy Put option you pay a premium to someone else to buy a stock at a particular price at some time in the future. They have the obligation

Sell Put....

I get myself confused in the case say of a PUT I understand if I BUY a PUT I want to insure myself so I pay the premium incase the stock tumbles so I can sell at a set price

Then I lose it when it comes to SELL a PUT I would think I receive the premium and?????

There must be an easier way to understand this


Cheers
SG

 

[potato]

I guess how I remember it is like this...
A call option gives u the right to BUY a stock at a certian price.
A put option gives u the right to SELL a stock at a certian price.
So if u buy a call option that gives u the right to buy a stock at a certian price. e.g. if ABC was trading at $20 and u bought $25 call option for ABC. then the stock price went up to $30 u have the right to buy it at $25 even though it is trading at $30.
If you were to sell the call u would be on the other side. use the same example to think about it.
If u buy a put u have the right to sell a stock at a certian price e.g. if ABC was trading at $30 and u bought a $25 put option for ABC. Then the price of ABC dropped to $20 u then have the right to sell ABC at $25 even tho it is trading at $20. If u were to sell a put u would be on the other side.
Does that help??? its one of those things that are harder to explain then it really is..... the explaination is sometimes more confusing .....

 

[wayneL]

Then I lose it when it comes to SELL a PUT I would think i receive the premium and?????

The put seller has the obligation to buy etc

http://optionscoop.com/twosides-option-contract/

Looking at the put side of the equation, if the buyer of a put option has the right to sell, then the writer of the put option has the obligation to buy, if the put owner exercises his/her right. The full statement therefore, is that the put writer has the obligation to buy a certain amount of shares, if put to, at a certain price, on or before a certain date.

This is where the term “put” comes from; the option buyer has the right to “put” shares to the option writer.
In a Nutshell:

* The call option buyer has the right to buy.
* The call option writer has the obligation to sell.
* The put option buyer has the right to sell.
* The put option writer has the obligation to buy.

 

[sails]

...This gets frustrating there must be a laymans explanation to remember what each of the following do. I thought i did and just when i read to educate a bit more i get confused again. Could someone put me right?...

This is the same info as both Potato and Wayne have stated - just set out a bit differently to see if it might help

Sell Call option Means: receive the premium to sell stock you own ( if Covered call) at a agreed price at or before an expiration date. If don't own then must have it if assigned. You have the obligation

Yes, you've got it and the call seller has the obligation to SELL the stock if assigned. If you already own it, it's simple - assignment automatically sells your shares covered by that option

If the call seller is assigned and doesn't already own it, then they will find they are short shares in your account. Some brokers do not allow naked calls due to the risk.

So, either way, if assigned on a sold call option you are obligated to sell the relevant stock whether you own it or not.

(Sold put option is the same concept as the sold call option in that you will have to buy stock if assigned. IOW, the put seller is selling the put buyer insurance)

Buy Put option you pay a premium to someone else to buy a stock at a particular price at some time in the future. They have the obligation

Yes, again you have it. You are paying the put seller to take the downside risk (eg insurance). And they have the obligation to buy the stock if assigned.

Alternatively, as the option buyer, you have the right to exercise your stock and sell it at the put strike price.

(Buying a call option is the same concept as puts. The buyer has limited risk and the seller takes the remainder of that risk.)

In general terms:
Option buyers have rights and usually limited risks.
Option sellers have obligations and takes the risk for the option buyer.

I get myself confused in the case say of a PUT i understand if i BUY a PUT i want to insure myself so i pay the premium incase the stock tumbles so i can sell at a set price

Then i lose it when it comes to SELL a PUT i would think i receive the premium and?????

Yes, you understand the put buying concept.
Selling a put - let me finish your sentence: ...receive the premium and
(1) keep the premium if not assigned AND the market expires ABOVE your strike price
(2) obligated to buy the stock if assigned
(3) Can always close the position before expiry by buying the option you sold (unless assigned first).

In a nutshell:
Buying puts or calls means paying a premium which is the price paid in return for limiting risk.
Buying calls is usually best in strongly bullish conditions.
Buying puts is usually best in strongly bearish conditions.

Selling puts or calls means receiving premium in return for taking on the risk (you are taking the risk that the buyer wants to limit).
Selling calls is usually best in bearish to neutral conditions.
Selling puts is usually best in bullish to neutral conditions.

There are other risks attached to sold options such as dividends and other special circumstances - won't complicate things further at this stage - but just to point out that there are other mitigating factors to learn down the track...

- Written in haste - I'm sure Wayne will pick up any mistakes

 

[stargazer]

Hi all

Thanyou very much for your detailed explanations and further crystallizing it in my thick head..lol.

With sooooo many option strategies out there which one would be a bread and butter type strategy. I have been reading a bit about Spreads.

Sell a CALL
Buy a PUT

Also Covered Calls
Buy a PUT

Qu: Do I have to have an option account to see the dates and expiry and premiums lists on the eligible stocks. I find it hard to make comparisons etc when I can't view the stocks that are available.

Cheers
SG

 

[stargazer]

Hi

Sell a CALL
Buy a PUT

I meant Sell a Put so i agree to buy the stock at a certain price for a premium.

Then Buy a Put and pay the premium to reduce the risk.

(Put spread)


Cheers
SG

 

[sails]

...With sooooo many option strategies out there which one would be a bread and butter type strategy. I have been reading a bit about Spreads....

I don't know of any guaranteed "bread and butter" strategy - it depends if the market co-operates with your strategy!
eg.
- covered calls (similar risk to selling uncovered puts if the same sold strike is used) has large downside risk and limited upside gains.
- Iron Condors are a popular "bread and butter" strategy and they make money when the market stays inside the sold strikes. The catch is a big move that can wipe out months of profits in a few days.
- calendars work in a similar manner to ICs in that they can make money when the market is range bound however, volatility can severely affect the long (covering) leg which is placed further out in time. Calendars usually do best if entered when IV is low and likely to rise, then it potentially makes money from front month decay and an increase in the back month due to rising IV.

This is just a quick summary of some of the strategies people use to try and generate an income and they all have risks - some risks are not easily seen until one has a reasonable understanding of the greeks.

Sell a CALL
Buy a PUT

Selling a call and buying a put at the same strike WITHOUT buying shares behaves in a similar manner to owning the shares. Makes money on the upside and loses on the downside. Up coming dividends upset this somewhat as the puts become more expensive and the calls become cheaper.

However, if you buy stock to the sell call/buy put strategy, then you have a "collar" or a covered call with put protection.

Also Covered Calls
Buy a PUT

See above

Qu: Do I have to have an option account to see the dates and expiry and premiums lists on the eligible stocks. I find it hard to make comparisons etc when I can't view the stocks that are available.

Here is a PDF which is updated regularly (I think monthly) on the asx site and lists all the optionable stocks and other info like market makers and their obligations for each stock - also volatility & dividend info.
http://www.asx.com.au/investor/pdf/notices/2008/Clm05608.pdf

Hope that helps
Cheers